High-pressure X-ray photoelectron spectroscopy, mass spectrometry, and density functional theory calculations have been combined to study methane oxidation over Pd(100). The measurements reveal a high activity when a two-layer PdO(101) oriented film is formed. Although a one-layer PdO(101) film exhibits a similar surface structure, no or very little activity is observed. The calculations show that the presence of an oxygen atom directly below the coordinatively unsaturated Pd atom in the two-layer PdO(101) film is crucial for efficient methane dissociation, demonstrating a ligand effect that may be broadly important in determining the catalytic properties of oxide thin films.